30
Group of Thirty
TOWARD
EffEctivE GovErnancE
of FINANCIAL INSTITUTIONS
The views expressed in this report are those of the Working Group on
Corporate Governance and do not necessarily represent the views of all
individual members of the Group of Thirty.
ISBN 1-56708-156-8
Copies of this paper are available for $49 from:
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TOWARD
EffEctivE GovErnancE
of FINANCIAL INSTITUTIONS
30
Group of Thirty
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TABLE of CONTENTS
Abbreviations 4
Foreword 5
Acknowledgements 7
Corporate Governance Working Group 9
Executive Summary 11
Insights and Recommendations for Enhancing
Governance Eectiveness of Financial Institutions 19
Chapter 1: Addressing the Essential Question of Function 27
Chapter 2: The Vital Role of Boards of Directors 31

remuneration), was blind to the looming dangers on
the balance sheet and in the global economy, and
therefore failed to safeguard the FI, its customers
and shareholders, and society at large. Management
teams, boards of directors, regulators and supervi-
sors, and shareholders all failed, in their respective
roles, to prudently govern and oversee.
On the subject of governance as it applies to
FIs, much has been written and said in the past few
years. Notable among these statements are the 2009
Walker report (A Review of Corporate Governance
in UK Banks and other Financial Industry Entities)
and the Basel Committee’s Principles for Enhancing
Corporate Governance (2010). Many domestic regu-
lators and stock exchanges have also weighed in with
new requirements and guidelines for governance. The
Group of Thirty (G30) applauds these prior initia-
tives and supports not only the spirit of their conclu-
sions but also many of the detailed recommendations
they contain. The combination of these reports, self-
scrutiny by the firms themselves, and pressure from
regulatory overseers has already yielded substantial
changes in governance practice across the financial
services industry and around the globe.
Why would the G30 wish to add its own voice
to the body of work already available, in light of
progress being made?
 First, no one should presume that FI governance
is now fixed. It is true that boards are working
harder; supervisors are asking tough questions

Jr., with John G. Heimann, William R. Rhodes, and
Sir David Walker as its vice-chairmen. They were
supported by 11 other G30 members, who partici-
pated in an informal working group. Requests for
interviews went out from the G30 to the chairs of 41
of the world’s largest, most complex financial insti-
tutions—banks, insurance companies, and securi-
ties firms. In an extraordinary response, especially
in light of the pressures on each of these companies,
36 institutions shared their perspectives and expe-
riences through detailed discussions with board
leaders, CEOs, and selected senior management
leaders. In addition, the project team held discus-
sions with a global cross section of FI regulators and
supervisors. The majority of these interviews were
conducted in person, all under the Chatham House
Rule,
1
which encourages candor.
The report is the responsibility of the G30
Steering Committee and Working Group and reflects
broad areas of agreement among the participating
G30 members, who took part in their individual
capacities. All G30 members (aside from those with
current national official responsibilities) have had
the opportunity to review and discuss preliminary
drafts. The report does not reflect the official views
of those in policy-making positions or leadership
roles in the private sector.
The report is wide-ranging in its coverage of the

Group of Thirty
7
On behalf of the entire Group of Thirty (G30), we
would like to express our appreciation to those
whose time, talent, and energy have driven this
project to successful fruition. First, we would like to
thank the members of the Steering Committee and
Working Group, who guided the work at every stage
and added their unique insight.
Special recognition must go to the men and
women of the financial, regulatory, and supervisory
institutions whom we interviewed, who generously
and candidly shared their perspectives and experi-
ences and whose insight constitutes the heart of this
report. Participating financial institutions have their
headquarters in 16 different countries on six con-
tinents. From all points on the globe, these senior
leaders strongly testify to the role effective gover-
nance can play in securing the safety, soundness, and
performance of the global financial system.
No project of this magnitude can be accom-
plished without the committed effort of a strong
team. The G30 extends its deep appreciation to
Tapestry Networks; project director Tom Woodard;
and team members Mark Watson, Dennis Andrade,
ACKNOWLEDGEMENTS
and Christopher McDonnell. For this project,
Tapestry Networks carried out the core research
and drafted reports for review by the G30. They
organized and conducted more than 80 interviews,

Former Vice Chairman, Board of Governors of the Federal Reserve System
Vice Chairmen
John Heimann
Senior Adviser, Financial Stability Institute
Former U.S. Comptroller of the Currency
William R. Rhodes
President and CEO, William R. Rhodes Global Advisors
Senior Advisor, Citigroup
Former Senior Vice Chairman, Citigroup
Sir David Walker
Senior Adviser, Morgan Stanley International
Former Chairman, Morgan Stanley International
Former Chairman, Securities and Investments Board, UK
WORKING GROUP
CORPORATE GOVERNANCE WORKING GROUP
Jacob A. Frenkel
Chairman of the Board of Trustees,
Group of Thirty
Chairman, JPMorgan Chase International
Former Chairman, Group of Thirty
Former Governor, Bank of Israel
Former Professor of Economics,
University of Chicago
Former Counselor, Director of Research,
International Monetary Fund
Georey L. Bell
Executive Secretary, Group of Thirty
President, Geoffrey Bell and Company, Inc.
Guillermo de la Dehesa
Director and Member of the Executive

Bank of New York
Guillermo Ortiz
President and Chairman, Grupo Financiero Banorte
Former Governor, Banco de México
Former Chairman of the Board, Bank
for International Settlements
Former Secretary of Finance and
Public Credit, Mexico
Ernest Stern
Partner and Senior Adviser, The Rohatyn Group
Former Managing Director, JPMorgan Chase
Former Managing Director, World Bank
Ernesto Zedillo
Director, Yale Center for the Study of Globalization
Former President of Mexico
Zhou Xiaochuan
Governor, People’s Bank of China
Member of the Board of Directors, Bank
for International Settlements
Former President, China Construction Bank
Former Assistant Minister of Foreign Trade
Project Director
Thomas M. Woodard, Tapestry Networks
Experts
William Schlich, Ernst and Young
Mark Watson, Tapestry Networks
Dennis Andrade, Tapestry Networks
Christopher McDonnell, Tapestry Networks
Jon Feigelson, TIAA-CREF
Stuart Mackintosh, Group of Thirty

the choices and decisions of FIs are scrutinized,
management and oversight are strengthened and
streamlined, appropriate cultures are established
and reinforced, and FI leaders are supported and
assessed.
EXECUTIVE SUMMARY
WHY GOVERNANCE MATTERS
The global economic crisis, with the financial
services sector at its center, wreaked economic chaos
and imposed enormous costs on society. The depth,
breadth, speed, and impact of the crisis caught many
FI management teams and boards of directors by
surprise and stunned central banks, FI regulators,
supervisors,
5
and shareholders.
Enormous thought and debate has gone into dis-
covering what caused the global financial crisis and
how to avoid another. In his much- quoted 2009
report on the causes of the crisis, Lord Adair Turner,
chair of the UK’s Financial Services Authority (FSA),
cited seven proximate causes: (1) large, global macro-
economic imbalances; (2) an increase in commercial
banks’ involvement in risky trading activities; (3)
growth in securitized credit; (4) increased leverage;
(5) failure of banks to manage financial risks; (6)
inadequate capital buffers; and (7) a misplaced reli-
ance on complex math and credit ratings in assessing
risk.
6

or they failed to act with appropriate prudence.
Manage ment, whose decisions and actions deter-
mine the organization’s risk status, clearly failed to
understand and control risks. In many cases, spurred
on by shareholders, both management and the board
focused on performance to the detriment of prudence.
Effective governance is a necessary complement
to rules-based regulation. The system needs both.
Carefully crafted rules-based regulations concerning
capital, liquidity, permitted business activities, and
so forth are essential safeguards for the financial
system, while effective governance shapes, monitors,
and controls what actually happens in FIs.
Ineffective governance at financial institutions
was not the sole contributor to the global financial
crisis, but it was often an accomplice in the
context of massive macro economic vulnerability.
Effective governance can make a significant positive
difference by helping to prevent future crises or by
mitigating their deleterious impact. In other words,
the rewards for investment in effective governance
are great.
A CALL TO ACTION
Each of the four participants in the governance
system—boards of directors, management, supervi-
sors, and (to an extent) long-term shareholders—
needs to reassess their approach to FI governance
and take meaningful steps to make governance
stronger. This report offers a comprehensive set of
concrete insights and recommendations for what

compliance with best practice guidelines has become
very important to boards and to overseers charged
with monitoring and encouraging good governance.
The G30 hopes this report will contribute
meaning fully to the body of knowledge on gover-
nance and will be a useful tool for those tasked
with shaping governance systems.
Group of Thirty
13
THE ESSENTIAL QUESTION OF FUNCTION
Well-implemented governance structures and
processes are important, but whether and how
well they function are the essential questions.
Although the temptation to judge governance effec-
tiveness by the extent of conformance to a set of
perceived best practices can be overwhelming, it
is also counterproductive. Most studies of gover-
nance agree that it is end behaviors, much more
than frameworks and structures, that matter. “Box-
ticking” neither improves governance nor accurately
assesses it. Any arrangement can fail, but failures
are more often caused by undesirable behavior and
values than by bad structures and forms.
An examination of governance arrangements at
36 of the world’s largest FIs reveals a wide diver-
sity of approaches, driven by differences in culture,
law, institution-specific circumstances, the people
involved, and precedent. This diversity is a good
thing, since it means that the governance approaches
are tailored to address the unique circumstances

nurtured over time.
THE BOARD
Boards of directors play the pivotal role in FI
governance through their control of the three
factors that ultimately determine the success
of the FI: the choice of strategy; the assess-
ment of risk taking; and the assurance that
the necessary talent is in place, starting with
the CEO, to implement the agreed strategy.
The 2008–2009 financial crisis revealed that manage-
ment at certain FIs, with the knowledge and approval
of their boards, took decisions and actions that led
to terrible outcomes for employees, customers, share-
holders, and the wider economy. What should the
boards have done differently? To answer that ques-
tion, it is helpful to consider the mandate of boards.
Boards control the three key factors that
ultimately determine the success of an FI: the choice
of business model (strategy), the risk profile, and the
choice of CEO—and by extension the quality of the
top-management team. Boards that permit their time
and attention to be diverted disproportionately into
compliance and advisory activities at the expense of
strategy, risk, and talent issues are making a critical
mistake. Above all else, boards must take every step
possible to protect against potentially fatal risks.
FI boards in every country must take a long-term
view that encourages long-term value creation in the
shareholders’ interests, elevates prudence without
TOWARD EffEctivE GovErnancE of FINANCIAL INSTITUTIONS

nance requires a dedicated set of risk leaders in the
boardroom and executive suite, as well as robust and
appropriate risk frameworks, systems, and processes.
The history of financial crises, including the
2008–2009 crisis, is littered with firms that col-
lapsed or were taken to the brink by a failure of risk
governance. The most recent financial crisis demon-
strated the inability of many FIs to accurately gauge,
understand, and manage their risks. Firms greatly
understated their inherent risks, particularly corre-
lations across their businesses, and were woefully
unprepared for the exogenous risks that unfolded
during the crisis and afterward.
MANAGEMENT
Management needs to play a continuous pro-
active role in the overall governance process,
upward to the board and downward through
the organization.
The vast majority of governance and control pro-
cesses are embedded in the organizational fabric,
which is woven and maintained by management.
The board is dependent on management for infor-
mation and for translating sometimes highly tech-
nical information into issues and choices requiring
business judgment. Governance cannot be effective
without major continuing input from management
in identifying the big issues and presenting them for
discussion with the board.
Management needs to strengthen the fabric of
checks and balances in the organization. It must

and informal communications. But they must also
maintain their independence and accept that they
will at best have an incomplete picture. Similarly,
supervisors must not try to do the board’s job or
so overwhelm the board and management that they
cannot guide the FI.
Supervisors have a unique perspective on emerging
systemic, macroprudential risks and can compare
and contrast one FI with others. This is vital infor-
mation to develop and share.
Unfortunately, in the policy-making debate,
the qualitative aspect of supervision is sometimes
overshadowed by quantitative, rules-based regula-
tory requirements. Clearly, new capital, liquidity,
and related standards are essential to a more stable
global financial architecture, but enhanced over-
sight of the performance and decision-making pro-
cesses of major FIs is also essential.
SHAREHOLDERS
Long-term shareholders can and should
contribute meaningfully to effective FI
governance.
Shareholders can contribute meaningfully to the
effective governance of FIs. Most institutional
shareholders do not have seats on the board but
should nonetheless, to the extent possible, be active
in oversight of governance, commensurate with
their ownership objectives. Boards and management
teams should be encouraged to engage seriously with
shareholders, listen closely, and factor shareholder

decisions and personnel choices. Supervisors can do
likewise.
TOWARD EffEctivE GovErnancE of FINANCIAL INSTITUTIONS
16
CHANGING THE WAY WE THINK
ABOUT GOVERNANCE
The G30 is not the first to reach the conclusion that
proper behaviors are the key to effective FI gover-
nance. But this report endeavors to describe those
essential behaviors and to provide implementable
ideas for engendering them.
The key to changing the way people behave
is to change the way they think. Accordingly, the
paramount aim of this report is to promote among
board members, management leaders, supervisors,
and shareholders a practical and productive way
of thinking about effective governance. Only by
changing the way people think about governance can
we successfully induce the specific, tailored changes
that will enhance governance in each institution.
For example, FI leaders would govern and super-
visors and shareholders would assess governance
differently if they believed the following:
 Governance is an ongoing process, not a fixed set
of guidelines and procedures.
 Diversity of governance approaches across FIs is
a virtue, not a vice.
 To get deeper and deeper into the details of all
parts of the business may be a choice some boards
will make, but endless detail is not a prerequisite

 Values and culture are the ultimate “software”
that determines the behaviors of people through-
out the FI and the effectiveness of its governance
arrangements.
The list above is not comprehensive. The body of
the report contains a host of insights and recom-
mendations with the potential to shape thinking on
effective governance.
* * *
Group of Thirty
17
REPORT STRUCTURE
AND CORE MESSAGES
This report is composed of seven chapters, preceded
by a list of key recommendations. The chapter sub-
jects and messages are as follows.
1. Addressing the essential question of function
 Well-implemented governance structures
and processes are important, but whether
and how well they function are the essential
questions.
2. The vital role of boards of directors
 Boards of directors play the pivotal role in FI
governance through their control of the three
factors that ultimately determine the success
of the FI: the choice of strategy; assessment
of risk taking; and the assurance that the
necessary talent is in place, starting with the
CEO, to implement the agreed strategy.
3. Risk governance: A distinctive and crucial ele-

of people throughout the organization and
the ultimate effectiveness of its governance
arrangements.
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19
THE ESSENTIAL QUESTION OF FUNCTION
Well-implemented governance structures and
processes are important, but whether and how
well they function are the essential questions.
1. Diversity in governance approaches reflects
unique circumstances. Everywhere, from the
United States to Europe to China to Brazil to
Australia, there is convergence around the core
roles of the board, management, supervisors,
and shareholders. However, the specifics of those
roles vary substantially from firm to firm, and
from country to country, sometimes subtly and
sometimes quite starkly. FIs tailor their specific
model to optimize effectiveness under unique
circumstances.
2. Governance systems are defined by both hard-
ware and software. Governance systems are
built around a defined architecture comprising
both “hardware” (for example, organization
structures and processes) and “software” (for
example, people, skills, and values). The soft-
ware makes the hardware function.
3. Effective governance depends on people and how
they interact. Effective governance comes down
to people and how they interact, whether in the

in the CEO role, in finance, and in regulation
are particularly valuable. Credentials notwith-
standing, interpersonal chemistry is an essential
determinant of a board’s success.
3. Build, over time, a nuanced and broad under-
standing of all matters concerning the strategy,
risk appetite, and conduct of the firm, and an
understanding of the risks it faces and its resili-
ency. All board members should receive structured
induction and ongoing training. The clear trend
toward deeper engagement between directors and
management and between directors and external
constituents is to be applauded.
INSIGHTS AND RECOMMENDATIONS for
ENHANCING GOVERNANCE EFFECTIVENESS
of FINANCIAL INSTITUTIONS
TOWARD EffEctivE GovErnancE of FINANCIAL INSTITUTIONS
20
4. Appoint the CEO and gauge top talent in the
firm, assuring that the CEO and top team possess
the skills, values, attitudes, and energy essential to
success. A very good CEO is preferable to a “star”
CEO. The board must confirm the appointment
of independent members of the executive team,
including the chief risk officers (CROs) and head
of internal audit, and should be consulted with
respect to other very senior appointments. Boards
should maintain a focus on talent development
and succession planning, which are critical com-
ponents of organizational stability.

management, revisions are made, details are dis-
cussed, and eventually a strategy is hammered
out to which all are fully committed.
8. Challenge management, vigorously and thought-
fully discussing all strategic proposals, key risk
policies, and major operational issues. Effective
challenge demands integrity on the part of both
the board and management. Management must
accept the board’s prerogatives and respond
positively rather than defensively. Boards must
be careful not to undermine their own processes
with disingenuous motives. Board members who
challenge just to have their challenge recorded
are not acting in the interest of the institution.
9. Ensure that rigorous and robust processes are
in place to monitor organizational compli-
ance with the agreed strategy and risk appetite
and with all applicable laws and regulations.
Proactively follow up on potential weaknesses
or issues. Oversight and compliance are impor-
tant functions of the board, but boards that
permit their time and attention to be diverted
disproportionately into compliance and advisory
activities at the expense of strategy, risk gover-
nance, and talent issues make a critical mistake.
10. Assess the board’s own effectiveness regularly,
occasionally with the assistance of external
advisers, and share this assessment with the lead
supervisor. Boards should conduct periodic self-
evaluations that include candid and constructive

infrastructure in place.
2. Ensure the presence of a CRO who is indepen-
dent, has stature within the management
structure and unfettered access to the board
risk committee, and has the authority to find
the appropriate balance between constraint and
support of risk taking. The CRO must have the
independence, skills, and stature to influence the
firm’s risk-taking activities. The board should
approve the appointment of the CRO, and the
risk committee should annually review the
CRO’s compensation.
3. Determine a risk appetite that is clearly articu-
lated, properly linked to the firm’s strategy,
embedded across the firm, and which enables
risk taking. The FI’s risk appetite framework
should frame the choices regarding risks in
terms of the type of institution the board and
management are trying to build and sustain, and
it should clearly link risks and returns. To be
fully effective, the risk appetite framework must
be embedded deep within the firm and linked to
key management processes, such as capital allo-
cation decisions, new product and businesses
approvals, and compensation arrangements.
4. Actively assess and manage the risk culture so
that it supports the firm’s risk appetite. The risk
committee and full board play a critical role, with
management, in ensuring that the risk culture is
consistent with the firm’s risk profile aspirations.

take a broad perspective when overseeing risk,
including operational and reputational risks
that are difficult to measure and mitigate. They
should look for early warning signs of emerging
risks arising from increasingly complex organi-
zational structures and products or businesses
with unexpected overperformance.
8. Strengthen the firm’s ability to withstand exog-
enous shocks, recognizing that it is impossible
to avoid financial stresses when they come. No
FI is resistant to all possible crises, but judicious
advance planning and testing increases insti-
tutional robustness. Boards and management
teams should also examine how their firms have
reacted to actual unanticipated events in the
past, since historic reactions can be very infor-
mative about the firm’s resiliency.
MANAGEMENT
Management needs to play a continuous pro-
active role in the overall governance process,
upward to the board and downward through
the organization.
For management to play its governance role effec-
tively, it must take the following actions:
1. Be accountable for the daily effectiveness of
the control architecture. Management must
establish a control framework designed to
prevent problems, actively monitor the firm on an
ongoing basis, and aggressively address issues that
arise. Management must ensure employees and

effective, ongoing communication between the
board and management on key decisions.
5. Expose directors to a broad set of executives
and employees, both informally and formally,
so they get an unfiltered view of the company.
Nothing should hinder communication between
directors and executives. Directors should be
free to talk to the executives, and they should
feel confident and comfortable in doing so—the
board-management relationship requires no less.
However, directors should exercise the privilege
of interaction with management with care.
6. Work continually on modeling and supporting
a culture that promotes long-term thinking,
discipline, and accountability. In addition to
explaining what is expected of employees,
members of management should model the
Group of Thirty
23
desired behaviors. Boards and management
should articulate the foundational principles or
values of the culture and foster their acceptance.
7. Encourage a culture of no surprises, the quick
elevation of issues, toleration of mistakes,
organizational learning, and punishment of
malfeasance. Management must be open and
transparent with the board and should promote
those qualities throughout the organization.
Only when management teams share their
concerns openly, and in a timely fashion, can the

where FIs are performing unexpectedly well and
consider the sustainability of that performance.
2. Develop a sophisticated appreciation of how cor-
porate governance works, including governance
structures and processes, board composition
and new director selection, and the internal
dynamics of effective FI boards. Supervisors
should seek to understand how effective gover-
nance and board challenge occurs in each FI, but
supervisors should also safeguard their indepen-
dence, attending board and committee meetings
only occasionally. They can reserve the right to
vet and approve new directors, as may be legally
required, while leaving board building to the
board chairman and nominating committee.
3. Develop trust-based relationships with senior
executives and directors by regularly engag-
ing them in an informal dialogue on industry
benchmarks, emerging systemic risks, and
supervisory concerns. Supervisors’ increasing
interaction and dialogue with senior executives
and directors on key strategy, risk, and gover-
nance issues is a positive trend.
4. Ensure boards and management govern effec-
tively by setting realistic expectations of FI
boards and adjusting regulatory guidance
accordingly. Regulatory guidance should clearly
articulate distinct roles and expectations for FI
boards and management. As supervisors develop
a deeper understanding of the culture and values